CIO of IDX Digital Assets


  • Cryptos and growth stocks have gotten wiped out in 2022 as growth slows and interest rates rise.
  • But Ben McMillan of IDX Digital Assets believes a turnaround is possible as the year progresses.
  • Here are five altcoins that McMillan likes — and what percentage of a portfolio should be in crypto.

Cryptocurrencies tend to perform like growth stocks, and the correlation between the two has never been tighter, according to Ben McMillan, the chief investment officer at IDX Digital Assets.

When high-risk stocks rise, like they did for much of last year, cryptocurrencies explode in value. In 2021, bitcoin and ethereum rose about 60% and 400%, respectively, which outpaced the tech-oriented Nasdaq Composite’s 21% return.

But when risk assets sell off in droves, as has been the case in 2022, cryptos get crushed. The Nasdaq has fallen 25% this year as economic growth slows, inflation spikes, and interest rates rise, though bitcoin (down 31.5% year-to-date) and ethereum (down 36.2% year-to-date) have been hit even harder. Worse yet, there are few signs that what’s been a catastrophic year for cryptos will reverse anytime soon.

Less-experienced crypto investors may be second-guessing their decision to dive into digital assets, but McMillan doesn’t think they should jump ship now — assuming they can stomach the wild twists and turns that the market is destined to bring this year.

“The bull case is still very strong going forward,” McMillan told Insider in a recent interview. “But in the context of that


volatility

, we say the exact same thing: You’ve got to be very mindful about the risk you’re underwriting.”

McMillan doesn’t have formal price targets for bitcoin and ethereum, but said he wouldn’t be surprised if the two largest cryptos by market capitalization hit new all-time highs this year. However, it’s quite possible that the two tokens fall further past their late-January lows, he noted.

Whether the bull or bear case plays out for cryptos depends on factors like when inflation peaks, how aggressively the


Federal Reserve

raises rates, and whether the US economy can avoid a


recession

, the CIO said. Markets need clarity on those fronts — even if it’s bad news — before cryptos can recover, McMillan said, though a rebound could come once there’s more certainty.

“That could start to lay the foundation for capital coming back into risk assets,” McMillan said. “And I think that’s where digital assets could disproportionately participate in the upside.”

How much crypto is too much?

Though McMillan said that cryptos are no longer the best way to diversify a portfolio, given their remarkably strong tie to growth stocks, he believes that it’s still smart to have some exposure to the nascent asset class and the blockchain technology that powers it.

The optimal percentage of an investor’s portfolio that should be in crypto varies by each person’s time horizon and risk tolerance, McMillan said. Those who are in retirement or nearing that stage may want to keep their crypto allocation small, or avoid the asset class entirely, the CIO said, though he added that younger people should consider taking more of a chance.

“The long-term bull story for blockchain technology is so robust,” McMillan said. “We’re still in the very early innings. I would definitely — if it were me — I would definitely want 5%, potentially even more, in digital assets.”

McMillan continued: “You really want to start with the risk in mind first with bitcoin as opposed to the return. It’s easy to get dollar signs in your eyes and look at historical-looking equity curves and try and size this thing up to 15%. But you really want to be mindful of the downside risk.”

How to invest in crypto: 4 altcoins to consider

McMillan’s firm, IDX Digital Assets, offers a pair of custom indices for bitcoin and ethereum that aim to provide investors with exposure to those assets with less volatility and downside risk by balancing positions in crypto and cash.

“There’s so much uncompensated risk in this asset class that it’s very difficult to justify just a long-only position 100% of the time,” McMillan said. “Because if you were to do that — exactly as you said — if you were to look at the long-only volatility of an unmanaged bitcoin position or digital assets and back out the required return to underwrite that volatility, it’s extremely high.”

As of Friday — before a brutal crypto selloff over the weekend that extended into Monday — the firm’s bitcoin index had performed in line with bitcoin, and its ethereum focused-product had outperformed its corresponding crypto by 10 percentage points.

But bitcoin and ethereum are far from the only cryptos in town. McMillan said that investors can diversify away from the two largest tokens by buying the dip in five altcoins that he has his eye on: solana (SOL), avalanche (AVAX), chainlink (LINK), terra luna (LUNA), and cardano (ADA).

“We don’t see them as ethereum killers,” McMillan said, adding that these altcoins are “rather complements to build out a broader kind of layer-1 base.”

Instead of trying to find the next breakout token, McMillan said that IDX Digital Assets looks for “quality” cryptos that have strong use cases and fast transaction speeds.

“What we’re really looking for is what’s going to be the backbone of Web3 going forward,” McMillan said. “And so we want products that are durable, that have momentum behind them. Not just dollars, but real developer momentum. We like to see well-funded projects.”



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